Security tokens function in blockchain-based systems by representing a digital ownership stake in a physical or digital asset. These tokens can be traded on various platforms and signify specific rights, such as profit-sharing, voting, or equity. Unlike utility tokens, which provide access to a product or service, security tokens are often subject to regulations and must comply with securities laws. By utilizing smart contracts on a blockchain, security tokens ensure transparency and reduce the need for intermediaries in transactions, potentially lowering costs and improving efficiency within financial markets.